You may believe that the concept “fractional ownership” is entirely foreign to you, but you’ll probably be wrong. Recall, if you can, when you were a kid and you and your siblings or friends pooled your allowances to buy a coveted, generally, expensive item—maybe a new NFL football, a Ouija board game or a pair of roller skates. Then, after you bought it, you worked out a comprehensive (convoluted?) schedule of who had control and care of your joint “prize” on specific weekdays or weekends. While your parents may have been dismayed by your enthusiasm (as in, “You wasted your money on that junk?”), you couldn’t have been less pleased with what you were able to accomplish as a group.
Fractional ownership allows you and a group of other individuals to own a percentage of an item, an investment, if you will—not of just a football, but perhaps an entire football team! Alright, that might be a bit beyond the financial means of a few individuals (unless your last names happen to be Trump, Gates or Buffet), but remember that there’s power in numbers. If you, as an individual, can’t afford the cost (or spare the time) to buy and maintain a luxury or vacation property, then you, as part of a group, can pool your resources to accomplish that goal jointly. Its only slightly more complicated than it was when you were a child, but it is something that can be worked out, if you agree to follow these ten steps:
- Agree on the property and jointly negotiate for the best deal. You don’t want anyone to feel that they’ve been “cheated” from the onset. The cost of the property is not just the initial purchase price, but for surveys, appraisals, title and property insurance, lender fees and points, recordation costs, etc.
- Agree on who has the decision making powers—will it be one-investor one-vote, or weighted and based on the percentage of ownership; decide whether a simple or super majority of the investors is sufficient.
- Agree to furnish the property jointly; everyone should contribute to a common fund for basic appliances and furnishings. The property will likely be an eclectic blend of styles, reflecting no single individual’s tastes, but, heck, you’ll only be using it part of the time, anyway.
- Agree on how to apportion the investment—base this decision not only on the funds needed, but how often you want to make use of it. If you split the cost of the investment among 4 investors, you’ll each have access (and responsibility) to the investment for 25% of the time; on the other hand, if you’ve got 10 investors, you’ve only got access to it 10% of the time. You need to work out an equitable arrangement so that everyone is satisfied with the time distribution.
- Agree on property upkeep and maintenance—whether you hire someone to physically care for the property year round, or agree to “pitch in” regularly, you’ll avoid potential disputes with the other investors.
- Agree on how best to take care of the carrying costs for the property. In order to avoid a dispute, and possible resentment, it’s best to arrange for a third party (i.e. property manager) to make the regular payments for utilities, insurance, taxes, etc. from a common fund set up for that purpose, and which can be funded quarterly or annually.
- Agree on the “penalty” if an investor doesn’t uphold his portion of the payment or time investment. Property and utility bills still need to be paid, so it would be wise to set up a sinking fund for the disposition of payments. The penalty could be loss of use until the delinquency is paid.
- Agree to the “house” rules—draw up a list of things important to you all, including such topics as “swapping” of the assigned time, “subletting” to third parties if you can’t use the property during your designated time, liability issues if something breaks while under your direct possession, etc.
- Agree, before the eventuality, on the disposition of an investor’s share—will you put the property up for sale on the open market, or will the other investors be permitted to buy out your share for a fair price?
- Agree to have a real estate attorney draw up a legally binding Tenancy in Common Agreement. Of all things that can be done to ensure the success of such a joint venture, this is the most important element. The Tenancy in Common Agreement is a contract signed by all of the fractional owners of the property, and which will be held in “reserve” to settle future property disputes; it should cover, at a minimum, all of the steps discussed above.
Fractional ownership of property, luxury or not, is an ideal means of obtaining a vacation property—property that you only plan to use for a fraction of the year, anyway. Unlike a timeshare, where you merely purchase the “time sharing” aspect of someone else’s property, in fractional property ownership, you purchase the “equity” in the property—you are the owner. For better or for worse, with all of the joys and headaches that property ownership entails, it’s all yours—and his and hers and theirs—until you all jointly decide otherwise.